Quarterly report pursuant to Section 13 or 15(d)

Financial Instruments and Risk Management

v3.21.1
Financial Instruments and Risk Management
 3 Months Ended
Mar. 31, 2021
Derivative Instruments and Hedging Activities Disclosure [Abstract]  
Financial Instruments and Risk Management
NOTE 12—FINANCIAL INSTRUMENTS AND RISK MANAGEMENT
In the normal course of business, the Company's financial position, results of operations and cash flows are routinely subject to a variety of risks. These risks include risks associated with financial markets, primarily currency exchange rate risk and, to a lesser extent, interest rate risk and equity market risk. The Company regularly assesses these risks and has established policies and business practices designed to mitigate them. The Company does not engage in speculative trading in any financial market.
The Company actively manages the risk of changes in functional currency equivalent cash flows resulting from anticipated non-functional currency denominated purchases and sales. Subsidiaries that use European euros, Canadian dollars, Japanese yen, Chinese renminbi, or Korean won as their functional currency are primarily exposed to changes in functional currency equivalent cash flows from anticipated United States dollar inventory purchases. Subsidiaries that use United States dollars and euros as their functional currency also have non-functional currency denominated sales for which the Company hedges the Canadian dollar and British pound. The Company manages these risks by using currency forward contracts formally designated and effective as cash flow hedges. Hedge effectiveness is generally determined by evaluating the ability of a hedging instrument's cumulative change in fair value to offset the cumulative change in the present value of expected cash flows on the underlying exposures. For forward contracts, forward points are included in the fair value of the cash flow hedge on a prospective basis. These costs or benefits are included in
Accumulated other comprehensive income (loss) until the underlying hedge transaction is recognized in either Net sales or Cost of sales, at which time, the forward points will also be recognized as a component of Net income.
The Company also uses currency forward contracts not formally designated as hedges to manage the consolidated currency exchange rate risk associated with the remeasurement of non-functional currency denominated monetary assets and liabilities by subsidiaries that use United States dollars, euros, Canadian dollars, yen, won, or renminbi as their functional currency. Non-functional currency denominated monetary assets and liabilities consist primarily of cash and cash equivalents, short-term investments, receivables, payables, deferred income taxes, and intercompany loans. The gains and losses generated on these currency forward contracts not formally designated as hedges are expected to be largely offset in Other non-operating income (expense), net by the gains and losses generated from the remeasurement of the non-functional currency denominated monetary assets and liabilities.
The following table presents the gross notional amount of outstanding derivative instruments:
(in thousands) March 31, 2021 December 31, 2020 March 31, 2020
Derivative instruments designated as cash flow hedges:
Currency forward contracts $ 484,176  $ 417,707  $ 458,823 
Derivative instruments not designated as cash flow hedges:
Currency forward contracts 219,961  326,280  205,030 
At March 31, 2021, $3.2 million of deferred net losses on both outstanding and matured derivatives recorded in Other comprehensive loss are expected to be reclassified to Net income during the next twelve months as a result of underlying hedged transactions also being recorded in Net sales or Cost of sales in the Condensed Consolidated Statements of Operations. Actual amounts ultimately reclassified to Net sales or Cost of sales in the Condensed Consolidated Statements of Comprehensive Income (Loss) are dependent on United States dollar exchange rates in effect against the euro, pound sterling, renminbi, Canadian dollar, and yen when outstanding derivative contracts mature.
At March 31, 2021, the Company's derivative contracts had a remaining maturity of less than four years. The maximum net exposure to any single counterparty, which is generally limited to the aggregate unrealized gain of all contracts with that counterparty, was $2.7 million at March 31, 2021. All of the Company's derivative counterparties have credit ratings that are investment grade or higher. The Company is a party to master netting arrangements that contain features that allow counterparties to net settle amounts arising from multiple separate derivative transactions or net settle in the case of certain triggering events such as a bankruptcy or major default of one of the counterparties to the transaction. The Company has not pledged assets or posted collateral as a requirement for entering into or maintaining derivative positions.
The following table presents the balance sheet classification and fair value of derivative instruments:
(in thousands) Balance Sheet Classification March 31, 2021 December 31, 2020 March 31, 2020
Derivative instruments designated as cash flow hedges:
Derivative instruments in asset positions:
Currency forward contracts Prepaid expenses and other current assets $ 2,438  $ 947  $ 18,945 
Currency forward contracts Other non-current assets 6,159  1,126  10,520 
Derivative instruments in liability positions:
Currency forward contracts Accrued liabilities 4,908  7,573  231 
Currency forward contracts Other long-term liabilities 2,337  6,590  — 
Derivative instruments not designated as cash flow hedges:
Derivative instruments in asset positions:
Currency forward contracts Prepaid expenses and other current assets 1,759  1,650  4,449 
Derivative instruments in liability positions:
Currency forward contracts Accrued liabilities 1,793  2,268  978 
The following table presents the statement of operations effect and classification of derivative instruments:
Three Months Ended March 31,
(in thousands) Statement Of Operations Classification 2021 2020
Currency Forward Contracts:
Derivative instruments designated as cash flow hedges:
Gain recognized in other comprehensive loss, net of tax
 — $ 9,279  $ 14,362 
Gain (loss) reclassified from accumulated other comprehensive income (loss) to income for the effective portion
 Net sales 100  (122)
Gain reclassified from accumulated other comprehensive income (loss) to income for the effective portion
 Cost of sales 772  2,795 
Gain reclassified from accumulated other comprehensive income (loss) to income as a result of cash flow hedge discontinuance
Other non-operating income (expense), net
 106  1,111 
Derivative instruments not designated as cash flow hedges:
Gain recognized in income
Other non-operating income (expense), net
 897  1,649